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Are stock returns still mean-reverting?

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  • Mukherji, Sandip
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    Abstract

    This study uses a powerful nonparametric block bootstrap method and fresh data to examine the unresolved issue of mean reversion in stock returns. The results show that both large and small company stocks experienced significant mean reversion in returns for periods of 1 through 5 years during 1926-1966. In 1967-2007, there was significant mean reversion in 5-year returns of large company stocks, and 1-, 4-, and 5-year returns of small company stocks. The findings indicate that, although mean reversion in stock returns has weakened in recent decades, it persists, particularly for small company stocks.

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    File URL: http://www.sciencedirect.com/science/article/B6W61-50W8111-1/2/ab26f72aff631e4ad03eb815548d69a0
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    Bibliographic Info

    Article provided by Elsevier in its journal Review of Financial Economics.

    Volume (Year): 20 (2011)
    Issue (Month): 1 (January)
    Pages: 22-27

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    Handle: RePEc:eee:revfin:v:20:y:2011:i:1:p:22-27

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    Web page: http://www.elsevier.com/locate/inca/620170

    Related research

    Keywords: Mean reversion Stock returns Block bootstrap;

    References

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    1. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
    2. Richardson, Matthew & Smith, Tom, 1991. "Tests of Financial Models in the Presence of Overlapping Observations," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 227-54.
    3. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
    4. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
    5. Reinganum, Marc R., 1983. "The anomalous stock market behavior of small firms in January : Empirical tests for tax-loss selling effects," Journal of Financial Economics, Elsevier, vol. 12(1), pages 89-104, June.
    6. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
    7. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1988. "Mean Reversion in Equilibrium Asset Prices," NBER Working Papers 2762, National Bureau of Economic Research, Inc.
    8. McQueen, Grant, 1992. "Long-Horizon Mean-Reverting Stock Prices Revisited," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 1-18, March.
    9. Ronald Balvers & Yangru Wu & Erik Gilliland, 2000. "Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies," Journal of Finance, American Finance Association, vol. 55(2), pages 745-772, 04.
    10. Daniel, Kent, 2001. "The power and size of mean reversion tests," Journal of Empirical Finance, Elsevier, vol. 8(5), pages 493-535, December.
    11. Jegadeesh, Narasimhan, 1991. " Seasonality in Stock Price Mean Reversion: Evidence from the U.S. and the U.K," Journal of Finance, American Finance Association, vol. 46(4), pages 1427-44, September.
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    Cited by:
    1. Huffman, Stephen P. & Moll, Cliff R., 2013. "An examination of the relation between asymmetric risk measures, prior returns and expected daily stock returns," Review of Financial Economics, Elsevier, vol. 22(1), pages 8-19.

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